Objective 5 Flashcards
What are the Five Subfactors considered by S&P in the ERM Analysis?
(ERM123)
- Risk management culture;
- Risk controls;
- Strategic risk management;
- Emerging risks management;
- Risk models.
What are the S&P ERM Assessment Scores?
(ERM123)
1 - Very Strong
2- Strong
3 - Adequate with strong risk control
4 - Adequate
5 - Weak
Guideline for “1 - Very Strong” ERM Assessment
(ERM123)
Positive score for all 5 risk subfactors;
Good/Superior EC Model
Guideline for “2 - Strong” ERM Assessment
(ERM123)
Positive score for (a) risk management culture, (b) risk controls, and (c) strategic risk management,
Neutral for the rest,
No negatives.
Guideline for “3 - Adequate with strong risk control” ERM Assessment
(ERM123)
Positive score for risk controls subfactor,
Neutral for the rest.
Guideline for “4 - Adequate” ERM Assessment
(ERM123)
At least neutral (a) risk controls and (b) risk management culture;
Does not satisfy requirement for adequate with risk control.
Guideline for “5 - Weak” ERM Assessment
(ERM123)
Negative in (a) risk controls, and/or (b) risk management culture
Four key areas of “Risk management culture” risk subfactor
(ERM123)
- Risk governance and organization structure;
- Risk appetite framework;
- Risk reporting and communication;
- Incentive compensation structures.
What does the “Risk Controls” subfactor focus on? What are the main risk categories?
(ERM123)
The processes and procedures used to manage key risk exposures within the areas:
- credit and counterparty risk;
- equity risk;
- interest risk;
- insurance risk (including reserving);
- operational risk.
What are 6 key components of the Risk Control process?
(ERM123)
- Risk identification;
- Risk measurement and monitoring;
- Risk limits and standards;
- Risk management (to stay within limits);
- Risk limit enforcement;
- Risk learning.
What is the focus of the “Strategic risk management” subfactor?
(ERM123)
- Evidence of strategic decisions using economic risk/reward metrics + risk appetite;
- Balance of regulatory and accounting considerations;
- Choice and outcome of strategic decisions
- Risk/reward rationale in the chosen strategy.
What does the “Emerging Risk Management” subfactor focus on?
(ERM123)
How the insurer addresses risks that are not a current threat to creditworthiness, but could become one in the future
What are four uses of “Risk Models”?
(ERM123)
1) Measure risk exposures;
2) Test correlation and diversification;
3) Validate risk mitigation strategies;
4) Quantify capital requirements for a given risk profile.
What risk models are analyzed in the “Risk Models” subfactor?
(ERM123)
- Distinct risk and enterprise risk aggregation models;
- Day-to-day operations (e.g., pricing, valuation, projections;
- EC model
Is the existence and use of an EC model a pre-requisite for a positive “Risk Models” subfactor score?
(ERM123)
No
Define “Strategic risk management”
(ERM123)
Process through which insurers facilitate the optimization of adjusted returns, starting with (1) a view of the required risk capital and (2) a well-defined capital allocation process.
Definition of “Risk appetite”
(ERM123)
Framework that establishes the risks that the insurer wishes to acquire, avoid, retain and/or reduce
Definition of “Risk preferences”
(ERM123)
Qualitative risk appetite statements
Definition of “Risk tolerances”
(ERM123)
Quantitative risk appetite statements
Definition of “Risk limits”
(ERM123)
Quantitative boundaries that constrain specific risk-taking activities at the operational level
What is the general ORSA methodology?
(ERM126)
- Varies from territory to territory;
- No prescribed methodology;
- Should be proportionate to (the insurer’s own view of) the nature, scale and complexity of the risks.
ORSA’s 9 Key objectives
(ERM126)
- Allocate Board responsibly;
- Facilitate own risk assessment;
- Facilitate own solvency assessment;
- Ensure an appropriate forward-looking perspective;
- Be used as a key management information tool;
- Enhance internal and supervisory understanding;
- Provide a group-wide assessment;
- Ensure a continuous process;
- Ensure adequate documentation.
What is ORSA intended to achieve?
(ERM126)
- Assess the risks a insurer faces;
- Assess the amount of capital it required to protect against those risks;
- Document its assessment of risks and capital requirements.
Who is responsible for ORSA?
(ERM126)
The Board, whom is also responsible for making sure the insurer doesn’t take more risk than the capital base allows.
